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The GDP of Stimulus

Now that the Great Recession has been declared dead and gone by everyone who failed to see the possibility of it happening in the first place, it is important to examine the reasons for its demise.

The White House has been busy declaring that its Stimulus policies have created or saved 640,000 jobs. We should note that the White House originally claimed credit for 1 million jobs, and only revised them down after realizing that they are spending $234,000 for each job saved. More revisions are sure to come.
It's also important to note that the job number is based on mathematical calculations and is impossible to prove.

One thing that can't be denied is that the stimulus did have an effect on the economy. It's this impact that needs to be examined further.

Getting Rich on Klunkers

The impact of the Cash4Klunkers program cannot be understated.
Historically auto sales add about 0.1% or 0.2% to the GDP. In the 3rd quarter of 2009 auto sales added 1.7% to the GDP. That is unprecedented and impossible to duplicate.
Without the Cash4Klunkers program, the GDP number would have come in at about 2%, rather than 3.5%.

A valid way to evaluate the program economically, it says, is to look at how many people purchased cars that otherwise wouldn’t have been bought. The firm says that number is about 125,000 cars. By that measure, the government spent $24,000 to generate each sale of a new car.
For comparison, the average price for a new vehicle in August 2009 was $26,915, minus an average cash rebate of $1,667.

The Cash4Klunkers program ended with the 3rd Quarter and thus won't be contributing to the 4th Quarter numbers. What's more, the Cash4Klunkers program moved car sales forward. Thousands of autos that would normally have been purchased in the 4th Quarter got purchased on the 3rd Quarter instead. Therefore the Cash4Klunkers program will subtract from the 4th Quarter's GDP numbers.

Getting Rich on Bonds

Most people didn't notice the news from the Federal Reserve yesterday. They announced an end to the monetization of Treasury bonds.
The Federal Reserve has created $300 Billion out of thin air over the last seven months to purchase Treasury bonds. This program is now over.

"Some of the reality starting to hit the market: that the biggest buyer in the world will some day become the biggest seller," said Kevin Giddis, managing director of fixed income for Morgan Keegan & Co.
"These levels can't sustain themselves," he said, referring to bond yields.

The Federal Reserve bought 50% of all new Treasury bonds issued in the 2nd Quarter.
The monetization of these Treasuries has helped keep interest rates low, thus allowing the federal government to borrow at artificially low rates. The cost of this program has been a falling dollar, a cost paid by all the dollar savers of the world.
It has also given the housing sector a temporary and artificial boost. This program won't be there for most of the 4th Quarter.

The Federal Reserve has also been active in buying mortgage-backed securities from Fannie Mae and Freddie Mac in order to prop up the market. The massive $1.45 Trillion program is supposed to finish by the end of the year.

(Bloomberg) -- The Federal Reserve said it will slow its purchases of mortgage-backed securities and housing- agency bonds while noting that the U.S. economy has strengthened.
...
The Fed’s purchases “have been essential,” Julia Coronado, senior U.S. economist at BNP Paribas SA in New York, and a former member of the Fed Board forecasting staff, said before the announcement. “Without that liquidity, there would be a much worse outcome in the housing market.”

Like the Treasury bond program, the Fed has been the largest buyer of agency bonds, by far.
The Fed has already used most of the money allocated to this program. While the program isn't over, it will be winding down.

Getting Rich on Houses

Judging from the latest developments, it appears that the Obama Administration is about to OK an extension and expansion the first-time homebuyers tax credit.
When it comes to assessing the many government programs designed to alleviate the housing crisis, you have to put it into perspective.

The first-time homebuyers tax credit has many things in common with the Cash4Klunkers program. For instance, it steals future home purchases from the future.

"The buyers I'm working with were looking at apartments and debating whether to buy," said Adina Greenberg, a real estate agent at The Corcoran Group, the largest residential real estate firm in New York City. "Knowing the first-time home buyer tax credit was ending, they decided: 'Let's do it now.'"

Another thing it has in common is that it is extremely expensive for what it tries to do.

"In about four out of five cases, the tax credit went to people who would have bought a home anyway, so that means the real cost of getting that one extra buyer into the market is five times $8,000 - about $40,000," said Andrew Jakabovics, associate director for housing and economics at the Center for American Progress, a Washington, D.C.-based think tank.

Treasury Inspector General for Tax Administration J. Russell George told a House panel that more than 19,000 people filed 2008 tax returns or amended returns claiming the credit for homes they had not yet purchased. Those claims amounted to $139 million and it was not clear that the IRS planned to go back to verify that those purchases actually took place, he said.
George said his office had identified another $500 million in claims, by some 74,000 taxpayers, where there were indications of prior home ownership.

Like the taxpayer bailout of Wall Street last year, Congress threw taxpayer money at a problem without putting even a modest amount of accounting and anti-fraud checks on the program.

Among those claiming bogus credits, at least some of them were definitely first-timers. The credit has already been claimed by 500 people under the age of 18, including a four-year-old.
...
Mr. George said his staff has found at least 53 cases of IRS employees filing "illegal or inappropriate" claims for the credit. "In all honesty this is an interim report. I expect that the number would be much larger than that number," he said.

This tax credit's cost is running about $1 Billion a month.
One can only wonder how much fraud we'll see as the program is extended and expanded. We also must wonder how much good would have been done if the money had instead been directed to keeping people from losing their homes in the first place.
Finally, the program's extension will have diminishing effects in the future. The number of people who rushed out to purchase homes to take advantage of the tax credit before the deadline will dwindle, and now people know that there is no longer a rush.

Getting Rich on War

Many people seem to have forgotten that we are currently engaged in two expensive wars. Wars are the traditional way for governments to stimulate the economy (and silence dissent).
America of today is no exception.

Whether the recovery becomes self-sustaining or recedes back into recession depends first on how businesses respond to recent improvements in sales and profitability. As the benefit of the stimulus fades, businesses must fill the void by hiring and investing more actively. To date, there is not much evidence that they are doing this. At most, firms are curtailing layoffs and no longer cutting back on orders for equipment and software.
... Unless hiring revives, job growth will not resume and unemployment will continue to rise, depressing wages and ultimately short-circuiting consumer spending and the recovery itself.
It is possible that firms will resume hiring soon. There is historically a lag between a pickup in production and increased hiring. In the past, however, during the gap between increased production and increased full-time hiring, businesses boosted working hours and brought on more temporary employees. None of this has happened so far; hours worked remain stuck at a record low, and temporary jobs continue to decline.
... Businesses may also wonder if demand for their products will soon fade, given that the recent improvement is supported by the monetary and fiscal stimulus and an inventory swing, all of which are temporary.

This stimulus spending isn't free money. It comes at a cost.
I'm not just talking about the burden on future taxpayers yet unborn, although that is the most obvious, and immoral, cost. There are also more immediate costs.

Because of the housing and auto subsidies, the personal savings rate plunged to 3.3% in Q3 from 4.9% in Q2 — in the past quarter-century, there have been only four other times that the savings rate went down so much in one quarter. If not for that plunge in savings, real GDP actually would have contracted fractionally last quarter. The entire GDP growth was funded by a rundown in the savings rate that occurs less than 5% of the time.

You have to wonder about the wisdom of encouraging people with no savings to borrow more money at a time when there are no jobs. That's like encouraging a habitual gambler to bet his mortgage at blackjack - what if the bet fails?

The question has to be asked, if companies, both non-financial and financial, are big believers in this new post-recession V-shaped recovery that seems to have the hedge funds and most strategists excited, why are companies still cutting back in capital expenditures and inventories and why are banks still cutting back on lending at an unprecedented 15% annual rate?

The big money, the smart money, isn't investing on the 3rd Quarter GDP numbers. You should be skeptical too.

Meta:

Comments

I tried to hit out these points yesterday but this post really nails it home.

I think this is why the DOW crashed and burned today, you're right, the smart money sees this isn't sustainable.

But even more, when I tried to imply, it's like the Stimulus is just trying to re-inflate the old model which got us here in the first place...

an absurd debt laden consumer society when people just do not have the income to support it and more residential home sales where prices are still out of whack with the median income levels and affordability.

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Both tax credits are poor excuses for stimulus or even counter cyclical remedies but are great politics.

Ironically, it was Sen. Isakson (R - GA) who originally proposed the home tax credit in the stimulus plan which he eventually voted against but takes credit anyway. And he is at it again with the extension.

this little jewel from the Census Bureau's retail numbers is interesting.

Unfortunately Cash for Clunkers was a blip. I think that it had real promise, but I don't think that it was targeted enough. It should have been targeted specifically towards creating volume to pay the start up costs of specific smaller vehicles.

And as straight stimulus, the real problem was that it wasn't large enough.

In the case of the Great Depression, it was arguably only the massive government spending for the war that led to recovery. There's some kind of lesson in there.

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UI, Medicaid, and food stamps are good. Not because they are economically efficient, but because they are necessary to the health of communities and families.

Cash4Klunkers and the first-time homebuyers tax credit, not so good. Not just because of the fraud involved, but because it is an inefficient use of taxpayer money. Even economists are against it. What's more, it encourages people to go further into debt.

The best stimulus of all, the one we really haven't tried yet, and the one that socialists most endorse, is work programs. The WWII spending you mentioned was essentially a massive work program.
Millions went into the military. Millions more went into factories. It program worked because it directly put people to work. That's why the WPA during the GD was so popular.
We should use this same idea with the nation's infrastructure.

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A WPA type program must be considered a long with other types of government programs (National Infrastructure Bank). Private sector is just not capable of filling the job gap created by the Great Recession. Hell their job creating capabilities were questionable even before the Great Recession.

as Keynes said, one properly uses the tax structure and government spending to tweak the economy, NOT solely as a recurring crutch (or stimulus) to hobble the economy along.

Rubinomics, or Greenspanomics, or Greedonomics will never cut it -- but that is the message of the preceding, and present, administrations.

The writing was clear for all to see when President Obama appointed Diana Farrell to his administration in an economic advisory position (along with the rest of those Wall Street lobbyists and pharmaceutical industry lobbyists).

Farrell is Public Enemy Number One, who earned all her millions in her adult working life by pushing for, proselytizing about, and consulting and writing to generate that as many American jobs be offshored as possible!

The only quality appointment to date in Washington, D.C., is Elizabeth Warren, and she was appointed by congress to the oversight position and wields no power.

We can be sure that until the Obama Administration appoints individuals of her caliber, or Prof. James Galbraith, or Prof. Batra, or other truly thinking economics' types, we are head for serfdom the hard way.

All we have now are the typical Wall Street lineup of crooks and greedsters who will screw us forever.

And with regard to this "public option" scam, which is neither healthcare reform nor health insurance reform, why oh why does it kick in in 2013?

I think this was a great analysis and it seems like the truth is more or less the opposite of what "they" say it is. This really makes me a lot more pessimistic about the state of things now and the state of things to come. It just goes to show how the numbers and statistics could be made to look like they represent the opposite of what they really represent. And I don't like that one bit. Thanks for this great analysis of the real truth. -Rob

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I read in one of my daily economic reports that Mr. Obama wants credit for the supposed 3.5 economic growth. I had composed a letter to the White House asking if this took into account all of the tax credits, stimulus checks etc and were they deducted before they claimed a 3.5 growth. I decided to check the internet first and found this site which confirms my suspicions, no growth, and the fact that the 4th quarter and probably longer has been raped of sales because of our money being thrown at the public to make it look good. And next comes the appliances. If I see consistent and true economic growth and people back to work at the end of 2 years I will eat my words and apologize to all of my friends that I bugged so badly this year. I am still so frightened for our family's and friend's futures after the decades of insanity in Washington.
I am proud to be a member of the Tea Party rather than a Boot Licker

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From what I can tell, although I'm not tracking, the policies proposed by "tea parties" would make things even worse. That's the problem, it's not that Stimulus was not needed, it was, it's the details, it's the directed funds. Obviously using Stimulus money to create jobs in China or India is not the concept of Keynesian temporary deficit spending. The idea was to give income directly into the hands of citizens, to spur demand.

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As far as I know, the people who attended the so called Tea Party rallies have no distinct policy. They are people who are honestly concerned about government taking more control of our lives and another big government program doomed to the same failure as the Medicare, Medicaid, Social Security etc. Help is needed in the healthcare of our citizens, but not in this form. We can NOT afford this plan. If Obama lived up to his pledge not to add one penny to the debt we would have nothing to worry about, but in reviewing what has already taken place in his administration this will not be the case. Congress for decades has been taking this country into a place no one wants to be. Until they include themselves and other federal employees in any law, affecting any American citizens, on any subject and on an equal basis they cannot fairly enact anything. The stimulus bills and tax credits were enacted with little or no checks and balances and no accountability. And we are to trust them. No way

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where were the protests when Bush spent wildly, cut taxes that we couldn't afford and mismanaged 2 wars. Now people say we cannot afford health care for millions of Americans who are uninsured. You say "help is needed" but no where in any other country is there a "free market" health care system there is government involvement at some level some much higher than others.

No, I am not saying they should be eliminated, they should all be fixed and should have been long ago. I am saying they are broke which is true. Decades of action and inaction by Congress has gotten us here and they just keep compounding the mess. I do support healthcare for those who cannot afford it, but not with this abomination.
When Congress puts and keeps themselves on the same level as the rest of us, in regard to the laws they enact, I may regain some trust in them doing their job. I know there are some who do care but they seem to be fewer and fewer and with less and less influence which does not speak well for the moral and ethical direction of this country. I noticed that the report that leaked out about the ethics committee's investigations had about 4 times more democrats than republicans and that gives me much food for thought.

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OK. We try to focus on the facts and details. SS is actually solvent and easily fixed with removing on the regressivity of the taxes on it.

It is Medicaid/Medicare that is ballooning and much of this is due to the out of control costs....and try examining the "for profit" health care sector companies on that one, not the workers, or even Doctors for ballooning costs.

Both parties are corrupt, bought and paid for by corporate lobbyists. there are many in Congress who are honest, trying very hard but are often beaten down by lobbyists and their political puppets.

Lobbyists also driven the public "debate" with a lot of false information.

Example is the health insurance companies trying to block any reforms and using cable news, fictional reports to do it.

You can see on EP, we are non-partisan in our blasts. If it's stupid policy, it's stupid policy, if it's a bad bill, it's a bad bill.

But the point is to dig out the truth and there are a lot of think tanks also spewing out false reports, or are front groups for lobbyists, so one really needs to dig into information from 1st principles to swim through the noise.

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The problem with these arguments is Medicare, medicaid and VA health care work and are government run and work pretty well.

No one is talking about the wait times in the U.S. with private health care to get into a specialist, the wait lists for surgery and so on.

This issue is fictional, "big" government vs. "small" government.

What I want is efficient government, not corrupt government.

But having the insurance companies run health care is obviously inefficient and corrupt. How else can the U.S. pay 2 times to 8 times more per person in health care and have worst results than other nations.

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